Wheat Prices Rising on Russia Drought, But Panic Is Unjustified

The USDA has estimated world production of wheat in 2010-11 to be 661 million metric tons, down 3% from 2009-10 but still the third-largest crop on record.

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The drought in Russia, Ukraine, and Kazakhstan has spurred the biggest one-month rise in wheat prices in 30 years, leading to a state of near-panic within the food industry and warnings to expect a surge in grocery bills.

Others are afraid that riots will break out, as they did during the 2007-2008 global food crisis, over shortages and skyrocketing costs.

"This is the fastest wheat price rally we have seen since 1972-73," Gary Sharkey, head of wheat procurement at UK-based Premier Foods, told the Financial Times.

Dmitry Rylko, director of the Institute for Agricultural Market Studies, said, "The scale of the drought is so severe we must be prepared for any option."

However, money manager Shawn Hackett, founder and CEO of Hackett Financial Advisors, a firm with a specialized focus on agricultural commodities, tells Minyanville that the sky isn't falling.

"We went through this a couple of years back," he says. "Wheat was up around $12-$14, then it crashed. What we have now is a supply-driven rally, which is temporary, unlike a demand-driven one. A demand-driven rally, like the one in coffee, is more of a problem."

Hackett maintains that the market has "reacted to what's happened in Russia," and believes the fears of a world without wheat are unjustified.

"Remember, we went into this with very, very large excess wheat supplies," he explains. "There is no shortage of wheat around the world. In the US, we've got more wheat than what we know what to do with."

The US Department of Agriculture reported Monday that Minnesota's corn, soybean, and wheat crops are in the best shape of any state in the nation. And if those conditions hold, the harvest of all three crops could reach an all-time record yield.

The annual tour by spring wheat millers and buyers this summer pegged the spring wheat crop at only a half-bushel shy of last year's record-yielding crop and nothing yet, including early harvest returns, shows to contradict that.

Yields of Washington winter wheat are predicted this year to reach about 65 bushels per acre, up from 59 bushels in 2009, while the spring wheat harvest is projected at a record 56 bushels per acre, according to a forecast by the US Department of Agriculture's National Agricultural Statistics Service. Yields of Washington winter wheat alone are forecast to be 111.8 million bushels, up from 96.7 million bushels in 2009, according to the USDA. The bulk of the state's wheat is exported.

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